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The Economic Process and The Free Enterprise System Overview Students are exposed to basic concepts of the free market system and participate in activities to reinforce concepts of the economic process. Objective Students will be able to: Define the role consumers and producers play in the economic process. Explain how money flows through the economy. Describe the characteristics of a traditional, command, market and mixed economic system. Describe the concepts of the Free Enterprise System. Preparation Review lesson and facilitate activities to demonstrate how the economic process works. Students have copies of the Circular Flow, Free Enterprise Map and We Compete! in their Student Workbooks. Prepare to display curriculum sheets on the board. Display the Free Enterprise Examples sheet found at the end of this lesson to facilitate group responses. Gather and prepare appropriate materials for the activities. Discussion: The Economic Process Ask students to brainstorm and tell you all of the words they associate with the terms economics and free enterprise. Write their responses on the board. Define the following terms for students and explain their roles in the economic process. When appropriate, link your definition to a correct student response to reinforce understanding of concepts. Producers: people who combine natural, human and/or capital resources to make goods or provide services Consumers: people who buy and use goods and services; also called buyers Ask students to provide examples of a producer and a consumer and write the examples on the board under the proper heading, “producer” or “consumer.” To facilitate the discussion, you might offer the example below: Newspaper: Provides a service to the community by producing and reporting news. The news can be in the form of information, entertainment or analysis. Other businesses in town pay the newspaper to perform this service. Customers: Individuals who purchase goods and services in town. A consumer Young AmeriTowne Chapter 1 – Basic Economics 1-10 might choose to buy a briefcase, which is a good. A customer might also buy a newspaper, which is a service. Engage students in a discussion about how producers and consumers generate income and pay for expenses. Look for comments similar to those listed below: Producers: Income (revenue from goods and services) Expenses (employee salaries, rent, advertising, materials and supplies, electricity, employee education and training) Consumers: Income (salaries, interest from savings, dividends from mutual funds and stocks) Expenses (rent or mortgage, food, entertainment, clothing, newspapers and magazines, souvenirs and toys) Remind students that all things that satisfy people’s needs and wants require resources. Ask students to name the four resources that they discussed previously. Answer: Land, labor, capital and entrepreneurship. Suggest that these resources are limited in quality and quantity. Ask students how the resources converted, transformed, shaped or molded into goods and services and how do people acquire them? In other words, how does economic activity take place in a market economy? Discussion: The best description is the classic economic model “the circular flow of economic activity.” Ask students to turn to the Circular Flow page in their Student Workbooks. Explain that the Circular Flow model illustrates economic interaction in the U.S. between households, business firms and government. There is a circular flow of economic activity of markets between households and business constantly in motion. NOTE: If students have not seen the model before, explain that it shows the “big picture” of how key parts of the macro economy fit together. Households, or consumers, and government provide businesses with payments in exchange for goods and services. Business firms and the government make payments to households of workers and investors, in exchange for labor and other resources. Governments provide public goods and services to households and businesses in exchange for taxes. Each of the parts depend on and is influenced by the others. Discussion: The Free Enterprise System Suggest to students that they need to understand what the free enterprise system is because they use it every day to purchase a good or service. The free enterprise system affects the choices they make about their money. Explain to students that sometimes the free enterprise system is also called a free market economy or capitalism. Review the characteristics of a traditional, command, market and mixed economic system: Young AmeriTowne Chapter 1 – Basic Economics 1-11 Traditional economy – Both production and distribution is based on procedures devised in the distant past and maintained by law, custom or belief. Command economy – An economy in which economic decisions are made largely by an authority such as a government-planning agency. Market economy – An economic system where most goods and services are exchanged through transactions between households and businesses. Mixed economy – An economic system that contains elements of traditional, command and market decision-making. Explain that in a free enterprise system, transactions between two groups takes place in a market. A market exists when buyers wishing to exchange money for a good or service are in contact with sellers wishing to exchange goods or services for money. Thus, a market is defined in terms of the fundamental forces of supply and demand and is NOT necessarily confined to any specific geographic location. Provide students with a definition of free enterprise: Free enterprise is the idea that people can invest in a business in order to earn a profit. Free enterprise is also the idea that the best way for the economic process to work is to allow producers to make their own decisions about what their business will sell and for consumers to decide what goods and services they will buy without interference from the government. In a free enterprise system, price in the market is the mechanism by which resources are allocated. Activity: Characteristics of the free enterprise system List the four questions on the board. Divide students into small groups and have them answer the questions by discussing them among themselves. Ask students to select a scribe to write down the group’s answers. Allow time for students to discuss the questions and then ask students to share their answers when you randomly select a group to respond. 1. What is profit? It is money left over after a business pays all costs, which include employee salaries, advertising, equipment, supplies, rent, electricity and maintenance. 2. How does a business get money to invest in the business? The business can make an offer to allow individuals to buy stock and become shareholders in the business or can borrow money from a bank and promise to repay the loan with interest. 3. What risk does a business take in borrowing money to run the business? The business might not earn enough money to repay the loan, pay shareholders dividends or earn a profit. Running a successful business requires skill and tenacity. While there are many successful small businesses in the United States, 60% of all small businesses, often defined as fewer than 500 employees, fail in the first six years of operation. Young AmeriTowne Chapter 1 – Basic Economics 1-12 4. What are the benefits of a free enterprise system? There are four benefits: Consumers are allowed to make their own choices about the goods and services they want to buy without interference from the government. Consumers have access to quality products because businesses have to make good products since they are in competition with one another for consumers and their money. Producers benefit from the free enterprise system because they make products consumers want to buy and earn a profit. Consumers benefit because they can buy goods and services at a good price and have many types of businesses from which to choose. Ask students how they feel about competition. Is it a good thing or is it a bad thing? Does anyone benefit from competition? If so, who benefits the most? Explain to students that one of the most important aspects of the free enterprise system is that it allows businesses to compete with one another. The definition of competition is when two or more businesses try to win over a customer to buy their product or service. Pure competition is a market structure characterized by many buyers and sellers, firms producing identical products and no barriers to producers to enter and exit. Suggest to students that there are generally two ways to view competition in the free enterprise system. The first one is that competition occurs between similar businesses such as restaurants or newspapers. The second type of competition is different types of businesses vying for the customer’s dollar. Emphasize to students that at Young AmeriTowne they will experience both types of competition. Activity: We Compete Direct students to complete the We Compete! page in their Student Workbooks to identify ways businesses compete with one another. Facilitate a discussion about the importance of price, quantity, and convenience to consumers. Suggest to students that since businesses in Young AmeriTowne are competing, it might be wise to remember the three ways to compete. Direct students to complete the Free Enterprise Map page in their Student Workbooks to better understand and explain the concepts of free enterprise. Note: This can be used as a homework assignment. Activity: Free Enterprise Examples Finally, to reinforce examples of free enterprise, lead a class discussion using the Free Enterprise Examples sheet displayed on the board. * Summary Ask students to predict what happens to the economic process if a business closes. For instance, what would happen in Young AmeriTowne if the Snack Shop closed? Young AmeriTowne Chapter 1 – Basic Economics 1-13 Discussion: Snack Shop employees would be without work and without income to spend at other businesses. Other businesses that depend on income from the Snack Shop include the Television Station, Newspaper, Radio, Sign and Print Shop, Parcel Service, College, Towne Hall, Containers Shop, Technical Services, Warehouse and the Bank. Have students provide examples of local businesses that have opened or closed in the "real world" and how it affected the economy. Explain that students will be both consumers and producers at Young AmeriTowne. Discuss the importance of spending AmeriDollars to support the economy. What would happen if employees received a paycheck, but did not spend their money? Discussion: The economy would slow down. Businesses would not make any money and would not be able to pay their bank loans. *Some of the activity handouts for this lesson were created by Enterprise Village, an organization based in Clearwater, Florida, with the mission of simulating a free market hands-on environment for youth in the Pinellas County School District. Young AmeriTowne Chapter 1 – Basic Economics 1-14